Itaú BBA - The MXN extends post regional elections rally

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The MXN extends post regional elections rally

June 13, 2017

The MXN is gaining 0.45% to 18.05/USD – level last seen in May 2016.

With information available until 6:30pm Brasilia time


  • The MXN is gaining 0.45% to 18.05/USD – level last seen in May 2016. Andeans stood broadly flat (CLP: -0.02% to 661.32/USD; COP: -0.03% to 2,933.00/USD). Finally, the BRL appreciated 0.14% to 3.3144/USD. 
  • Brazilian rates bear flattened as retail sales topped the most optimistic forecast (see Macro Backdrop). In DI futures, the Jan-18 increased 4bps to 9.20% and the Jan-21 went up 9bps to 9.36%. 

Macro Backdrop

  • Retail sales increase in April. Core retail sales advanced 1% mom/sa in April, above median of market estimates (-0.7%) and our forecast (-1.6%). Compared to April 2016, core sales expanded 2% and marked the first gain after 24 months in negative territory. Broad retail sales grew 1.5% mom/sa, also beating the median of market estimates (0.2%) and our call (- 0.2%). Compared to April 2016, broad retail sales dropped 0.4%. The surprise was led by the supermarket segment, up by 0.9% mom/sa, contributing about 0.4 p.p. to the core retail sales and 0.3 p.p. to the broad result. Importantly, this segment has been showing intense volatility in recent months. Notwithstanding a strong print in April, the increase was not broad-based. Out of 10 components in the broad indicator, only 4 posted seasonally-adjusted monthly increases. The biggest gain was in the segment comprising office equipment and material, which increased 10.2% mom/sa. On the negative side, the sharpest drop was in books, periodicals and magazines, down by 4.1% mom/sa.
  • We expect some recovery in retail sales in the coming months, influenced by the impact of disinflation on consumers’ real income and withdrawals from inactive accounts held under the FGTS employment protection program. In 2H17, the evolution will depend on labor market stabilization. Full Report
  • The labor reform proposal was read in the Senate’s Social Affairs Committee. According to Broadcast, the Commission President, Senator Marta Suplicy, announced the voting will take place next Tuesday (June 20). 
  • Macro vision: how far can the Brazilian CDS reach? Foreign investors’ risk perception, as measured by the CDS (credit default swap), has declined in several emerging economies. In Brazil, it was no different: the country-risk premium fell from 500bps in January 2016 to a level close to 250bps in June this year. However, maintaining the risk premium at lower levels requires the continuity of the reforms, as well as a continuing benign international scenario. Full Report
  • The BCB placed the full offering of 8,200 FX swaps. After closing, the central bank called for a roll over auction of up to 8,200 contracts on June 14. 


  • Macro vision: The ECB’s tricky road to monetary policy normalization. The Euro Area growth has improved, but inflation needs time to catch up. This scenario allows the ECB to recognize that risks have improved and move to a neutral stance. Looking ahead, the ECB’s exit strategy will need to be gradual, carefully executed, and clearly communicated. We expect the central bank to eventually announce and implement, starting in 2018, a simultaneous exit, with QE tapering and the removal of negative interest rates. Full Report
Market Developments 
  • GLOBAL MARKETS: On the eve of the FOMC meeting, equity markets were on the green and volatility gauges narrowed. The market’s implied probability of a hike is currently at 95%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices fell (WTI: -0.28% to 45.95/USD) after API said to report US crude supplies rose 2.75 million bbl last week. In FX, currencies under our coverage were mixed. Andeans stood broadly flat (CLP: -0.02% to 661.32/USD; COP: -0.03% to 2,933.00/USD). On the other hand, the BRL appreciated 0.14% to 3.3144/USD. At last, the MXN is trading 0.45% stronger to 18.05/USD – reaching a 1-year high. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed all across LatAm. Brazilian spreads inched down 1bp to 236bps. In Chile and Mexico, country risk narrowed 2bps to 67bps and 108bps, respectively. CDS in Colombia fell 3bps to 123bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates bear flattened as retail sales topped the most optimistic forecast (see Macro Backdrop). In DI futures, the Jan-18 increased 4bps to 9.20% and the Jan-21 went up 9bps to 9.36%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican narrowed in the session. In TIIE swaps, the 9-monht inched down 1bp to 7.41% and the 5-year fell 1bp to 7.15%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates narrowed 1-2bps in the session. In Camara swaps, the 1-year inched down 1bp to 2.48%, whereas past the 7-year, they went down 2bps. Chile Rates Tracker In Colombia, yields fell at the margin. In IBR swaps, while the 1-year stood flat at 5.10%, the 5-year fell 2bp to 5.16%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Service Sector Survey (PMS) will be released (Wed.). April’s PMS may have a relevant impact on GDP estimates for 2Q17 - we expect the headline to fall 5.8% year-over-year. Furthermore, the BCB will release during the week its monthly activity index (IBC-Br) for April. 
  • In Chile, the central bank will hold its June monetary policy meeting (Thu.). The central bank has implemented four 25-bp rate cuts in the first five months of the year, taking the policy rate to 2.5%. We expect BCCh to stay on hold this month. The minutes from the previous meeting alongside the 2Q inflation report released after the May meeting reveal a board that appears content to wait and observe how the economy unfolds given the monetary stimulus already implemented. 
  • In Colombia, activity indicators for the month of April will be published (Thu.). We expect industrial production to decrease 5.0% year over year (+4.8% in March). Meanwhile, retail sales likely saw a 0% growth rate (+1.9% previously). Then, think-tank Fedesarrollo will release the May consumer confidence (Thu.). Falling inflation, lower interest rates, and a firmer currency will likely aid some confidence recovery ahead. During the week, the central bank is expected to publish the current account balance for 1Q17. We expect a USD 2.4 billion deficit, smaller than the USD 3.6 billion deficit in 1Q16, as the trade balance of goods improved from one year ago on the back of recovering commodity prices and a weakening domestic demand.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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